Spain’s Sub-Zero Bills Show Insulation From Anxiety Over Greece

Spain sold three-month bills at negative yields for the first time, providing further evidence of the potency of the European Central Bank’s bond-buying program and officials’ determination to keep the euro area intact.

Even with yields on Greek three-year debt climbing toward 30 percent, the highest level since the nation’s debt was restructured in 2012, those on shorter-dated Spanish and Italian notes dropped. ECB Vice President Vitor Constancio said Monday the central bank is convinced “there will be no Greek exit” and pointed out that the treaty behind the single currency “does not foresee that a country can be formally, legally expelled” from the bloc.

“Despite Greece remaining under pressure, other peripheral markets are doing relatively well,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. “Even if there’s a risk of a default, the prospect of a Greek exit is not a central scenario” for the euro.

Spanish two-year note yields fell one basis point, or 0.01 percentage point, to 0.052 percent as of 4:50 p.m. London time, after reaching 0.09 percent on Monday, the highest since March 26. The price of the 4.25 percent securities due in October 2016 was 106.39 percent of face value. Italy’s two-year yield fell one basis point to 0.19 percent.

Debt Comeback

Less than three years after being in danger of joining Greece, Ireland and Portugal in losing access to financial markets, Spain this month could begin charging investors for the opportunity to lend it money.

The bills were allotted at an average yield of minus 0.029 percent compared with 0.004 percent at a sale on March 17. Tuesday’s offering came two weeks after the country sold debt at interest rates below zero for the first time when it auctioned six-month bills, reflecting investors’ confidence that the ECB’s quantitative-easing plan will support prices.

These signs of resilience, also reflected in stock-market gains across the region, came even as the ECB was said to be studying curbs on lending to Greek banks. The Greek government on Monday ordered local administrations to move their funds to the central bank as the nation struggled to find money for salaries, pensions and a repayment to the International Monetary Fund.

Money Markets

Greece hopes the move will keep the country afloat until May, and officials are counting on sufficient progress in bailout talks for a deal this month, according to a person familiar with the matter who spoke on condition of anonymity. The country’s creditors are demanding economic reforms in return for the final payments of its 2012 bailout package. Without the funds, Greece may run out of money by May.

The flood of liquidity is also reflected in money markets, with the three-month euro interbank offered rate, or Euribor, dropping to minus 0.001 percent on Tuesday, according to data from the European Money Markets Institute. That’s reflecting the introduction of a negative deposit rate, currently at minus 0.2 percent and the start of the ECB’s quantitative-easing program to inject 1.1 trillion euros into the region’s economy.

Incentives Over Greece

“There is no one who has any incentive for Greece to leave” the euro among parties involved in talks, apart from possibly the very far left of the governing Syriza party, Andrew Mulliner, portfolio manager at Henderson Global Investors, said in an interview yesterday. The company is looking to add holdings of so-called peripheral bonds in its Overseas Bond Fund on any further volatility, he said.

Greek government securities lost 18 percent this year through Monday, the only decline among sovereign markets tracked by Bloomberg World Bond Indexes. Italy’s returned 4.1 percent and Germany’s earned 4.5 percent, the indexes show.

Greece’s three-year note yield climbed to as high as 29.85 percent, while those on its 10-year securities reached 13.63 percent, the most since December 2012.

The yield on Germany’s 10-year bunds, the euro region’s benchmark sovereign securities, rose three basis points to 0.10 percent, up from 0.049 percent on Friday, the lowest since Bloomberg began collecting the data in 1989.

Before it's here, it's on the Bloomberg Terminal.